Other European countries, the United States, as well as the IMF have recommended that the German government reduce this surplus. Otherwise recovery is that much harder for the so-called deficit countries.

Most German economists and certainly the Merkel government countered these recommendations with a vigorous defense of German exports.

In particular, they rejected any implicit or explicit notion of voluntary export restraints. Those were used, for example, via as the “voluntary” caps on Japanese car exports to the United States that Japanese automobile manufactures agreed to in the 1980s under intense pressure from the Reagan Administration.

Misleading the public

However, this riposte from the German side completely misses the point. Nobody has really asked for Germany to take such steps. More importantly, the phalanx of Germany’s politicians, feeling the urge to defend Germany’s export prowess, are also misleading their constituents.

How so? They fail to acknowledge that the required actions to bring down the current account surplus, as suggested by the U.S./IMF/EU triumvirate, might allow Germany to sell even more cars, precision tools or medical equipment abroad.

This is because, in strictly economic terms, the current account deficit (or surplus) of any country is always equal to its so-called savings/investment gap. In other words, Germany’s projected 2013 surplus of exports over imports equal to 7% of GDP is identical to its surplus of savings over investments.

To find a proper balance, Germany must pursue the right mix of consuming more and increasing domestic investments.

The working poor

But there are serious impediments for Germany to do either without a major change in policy. Labor market reforms aimed at making Germany more competitive have created a new German economic underclass. It is, in effect, unable to increase its level of consumption.

At the same time, investments, especially by the public sector, have been severely constrained by Chancellor Merkel’s rigid pursuit of fiscal austerity.

The labor reforms introduced by Gerhard Schröder – often hailed by Merkel as a model for all of Europe – have left one quarter of the German workforce holding so-called mini, part-time or other low-paying jobs.

As hard as people try to find jobs – because unemployment benefits have also been sharply reduced – what good does it do them to find work if these jobs do not pay a living wage? Without a minimum wage, this large chunk of German workers cannot add to its consumption and hence help reduce the country’s savings overhang.

Higher wages with continued flexibility

Therefore, corrective actions must be taken in order to raise wages, while protecting the gains made in labor market flexibility. Higher wages for low-paid workers will allow them to consume more and consequently reduce Germany’s savings rate as well as its current account surplus.

And, in fact, some corrective action is likely following the ratification of the coalition agreement between Chancellor Merkel’s conservative party and the Social Democrats. It provides for the first-time adoption of an hourly minimum wage in Germany of €8.50 ($11.55) starting in 2015.

True, there are some escape clauses for employers to negotiate until 2017. Moreover, the agreement would seem to leave untouched the existence of so-called “mini jobs.” Employers could also still shift more workers to less paying part-time jobs. Nonetheless, a start has been made.

However, the current account surplus cannot be reduced to a more reasonable level by lowering German savings rates alone. Germany must also invest more domestically.

Underinvestment

Germany’s self-imposed fiscal austerity has come at a steep price. The German Institute of Economic Research (DIW) recently reported that Germany’s private and public sectors have underinvested in infrastructure, education, plants and machinery for years, depressing German productivity.

Aggressive public sector investments in crumbling roads and bridges as well as education, ending excessive austerity, would guarantee that the German private sector can increase future productivity. It would also allow the country to stay competitive without succumbing to the unsavory alternative of further increasing the number of the working poor.

In fact, the pickup of domestic demand that would be the consequence of such public sector investments would likely cause the private sector to invest more as well. Unfortunately, the new coalition agreement falls largely silent on this important subject.

Win-win scenario

Still, such increased investments would have the added benefit of reducing the country’s much criticized current account surplus. And rather than pulling back on exports, German manufacturers could perhaps even continue to increase their sales abroad.

Domestic policy shifts aimed at low-paid jobs would likely have little dampening effect on exports, in part because Germany’s strongest export products are high-end goods and services – e.g. the aforementioned cars, precision tools and medical equipment. The firms making them rarely employ low-wage workers anyway, given the required skill sets. So, it’s a win-win.

In stripping away the simplistic rhetoric on this subject, it should be obvious to all German politicians that reducing the German current account surplus does not simply benefit deficit countries, but that it is primarily in the German national interest.

About Uwe Bott

Even though I agree with all the points made in this article, I am not sure that they (alone) can carry the day with everyday Germans. Success in external accounts has become a virtue in the minds of Germans and, in consequence, excessive success becomes an excessive virtue. Hard to change that if it has become part of the DNA.

My point is that, to get the attention of everyday Germans, it isn’t good enough to tell them that they have something to gain. Instead, they must be told that they have something to lose. Something very important to Germans such as financial security, insurances, pensions, etc.

The current account surplus is, mathematically, equal to net capital exports. Germany, as an entire economy, is condemned to increase the net financial wealth which it holds outside is borders. The last time I checked, the net foreign assets were ‘only’ about 1.200 BEUR, approaching ‘only’ 50% of GDP. But what matters more are the gross foreign assets because should they decline in value, there would be no automatic decline in gross foreign liabilities. Thus, it would be a true financial loss to the German economy. Those gross foreign assets now exceed 7.000 BEUR, approaching 3-times GDP. Not a small piece of change; not even for the German economy.

The WSJ has recently calculated that Germany has taken losses of about 500 BEUR on its gross foreign assets since 2007. The everyday German doesn’t know that because those losses have not hit his tax bill (yet). They were recorded at higher levels of the economy (banks, insurance companies, etc.). But they are losses, nevertheless, and when an economy incurs financial losses, there will, at some point in the future, be less assets available if one needs to draw on them (like for pensions).

Tell the Germans that their pensions are at risk and they will listen immediately!

Uwe, I am really surprised you wrote this. I take my hat off to you. Your next article, I hope, will explain to us outsiders WHY such an obvious & much needed change of priorities (for Germany’s sake, not ours) appears to be completely OFF the table in Berlin.

ubott

Klaus, thanks for your comments. I completely agree with you, but as you know a short feature can only address so many things. I chose to address this part of the equation, because I believe that even outside Germany there are many who do not fully understand these fundamentals (in surplus and deficit countries). And Tsigantes, Klaus has the answer for you. It has become so ingrained in German DNA that they must save or that there can never be even the slightest sign inflation etc. that they will not listen to any reasonable and economic argument (sadly I believe they would not listen to Klaus’ correct description of the risks either). Their fear of inflation is beyond explanation, for example. The slightest uptick in prices and they will show the famous picture of a wheel barrel loaded up with money to buy bread, shot in the 1930s mind you.

Their entire response to the Eurozone crisis is just as dumbfounding (and then again as Klaus would probably say, it is not).

Klaus Kastner

Since I, too, was raised with the savings-DNA, allow me a little anecdote about my first lesson in macro-economics.

Back in 1967, I was an exchange student in Florida. My host parents were well to-do and ran a large hardware store. Not long after my arrival, they took me out to dinner. When the bill for the 3 of us came, I saw that it was about 100 USD. I mentally converted this into Austrian Schillings and gasped — that was a good portion of what my father was earning in Austria then per month. And then came the shock — they left a tip of 20 USD. That was equivalent to 500 ATS, a lot of money in Austria then.

Back in the car, I let my steam off. How can you spend so much money on dinner? And how can you possibly leave such a huge tip???

My host mother replied: “You see, we know those people. They are good people. They do a lot of buying at our store and we would like them to keep doing that”.

Believe it or not, that was the first time it occurred to me that the spending of A becomes income for B so that B can spend money on C so that C can generate income for A. That was quite a revelation for an 18-year old who had been told by a top professor at Gymnasium the following: “As a matter of principle, I don’t buy any products from companies which do advertising because I am not prepared to pay for their advertising”. And, believe me, I was not the only one in the class at the time who thought that that was smart…

Uwe, I don’t know why you think that I do not consider the EU handling of the crisis as dumbfounding. Well, it wasn’t really dumbfounding. It was arrogant, incompetent and plain silly. My blog is fully of articles on that.

storm

Wish more countrys can be like Germany.

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